Saturday, November 01, 2008

Socialism, the Cure for Our Mistakes

The economy and the money supply are contracting. Corporate earnings are abysmal and people are selling assets to raise cash. The government has nationalized the banking system (GM and Chrysler are next). They have loaned AIG 143 billion dollars and now the company teeters on bankruptcy (it could stop being a loan real quick). Incompetent Ben and Hank are the fools in charge. Hundreds of billions in loans will never be repaid, and no one is listening. No jail time here. Ask yourself one question; “What horrific disaster occurred that prompted the government to spend these massive sums of money?” Was it an earthquake, a hurricane or a famine?

The government right now wants to help everyone who bought a house that is left holding the bag (upside down). The Seller is in “Retirement City” enjoying the price they got for that "Fixer Upper." The taxpayer will cover the new buyer’s losses as the home’s value drops; such a deal!

Let’s see if I have it right. It’s OK to make money. But if there are massive losses in the private sector, the government will cover the losses. Free enterprise is for profits and socialism is for the losses. It's so simple even a caveman (Congressman) can understand the principle.

Last month half of all houses sold were foreclosures or REO’s. That doesn’t sound very promising for the economy. Enter the government who now provides “liquidity” to the banks for home loans. There is only one question on the new bank loan applications; “Do you have a job?” This is a tad more selective that the previous “Fog a Mirror” test for a home loan. No need to check the buyer out too closely, the loan will be government insured;

Senator Barney Frank wants to make sure that the banks are loaning the money for home loans rather than fixing their bottom line. "A dollar down" moves you into an REO and of course there is a bonus check up front (for needed repairs). The lien holder [insert nationalized bank name here] gets 50 cents (a guesstament) on the dollar payoff on the old loan. From here, the bank sells the new loan to Freddie or Fannie.

The program makes sense, to those that never did well in math. No closing costs, no money down, cash back and live rent free for 8 months then move back in with Mom and Dad. The people who have lost homes to foreclosure probably don’t qualify yet (Senator ‘Sesame Street’ Frank will probably fix that). Just wait for your kid to come home and give you the good news, “Dad I just bought a home for a dollar down!”

Frank wants the banks to loan more money (pushing on a string comes to mind). You'll need more that a toaster for bait. Nobody, right now, is in a hurry to buy a house, but there are a couple of million people wanting to sell you one before prices drop even lower.

You kind of wonder what we are getting for 4 trillion dollars, besides an education. I guess there is no real reason to worry; no one was ever serious about paying off the national debt, it just wasn't supposed to get this big. It is utterly amazing how this financial meltdown has produced so much destruction with very little physical damage. Nobody saw this coming, but to say the cure is obvious doesn't ring true. Welcome to the world of socialized finance. Our kids get the bill and Congress has exceeded our wildest expectations of gross incompetence.

Copyright 2008 All rights reserved


Superbear said...

Completely Agreed.

For Barney Frank to insist that Banks must lend money is ludicrous at best.

For lending to occur, there needs to be a qualified and willing lenders and borrowers. Currently, we have a dearth of both. You can throw as much money as you want, if borrower sees prices coming down (of anything), they would simply put off their purchase (borrowing) decisions and sit tight. Classic deflationary spiral.

There is no way to avoid it. Instead of making it worse by throwing money at it, they should simply get out of the way, drink the bitter medicine of severe recession over the next 2 years and cleanse the system of bad debt.

Trust me, we will be out of it and with renewed vigor.

Superbear said...

BTW, you still haven't answered why you put so much emphasis on November 4-5.

Perhaps after the fact?

Jim in San Marcos said...

Hi Shankar

I agree with your first post.

As for an answer to the second post:

I would expect a Democratic win on Tuesday to panic the Stock Market.

The real news wouldn't affect the market until Wednesday, but traders will start Monday placing their bets.

The Republicans love Capitalism and the Democrats love Socialism.

Right now it is too close to call.

Superbear said...

Thanks Jim.

I was just wondering if you had heard about a major company in trouble. Most market leaders have not participated in this rally.

- Shankar

Anonymous said...


You do a good job of pointing out economic issues to ponder. Socialism v. Capitalism is fodder only for the ignorant. Both have their limitations and drawbacks. In one the rich get to direct the economy, in the other the intellectuals, middle and poor do the planning. Neither meets the needs of all the citizens for very long. Free markets don't exist and when they do they rapidly become oligopolies and monopolies. Then it's just an old boys network making deals behind closed doors. How much insider trading do you think really takes place on Wall Street? My guess is plenty. It's too easy to do to swear it off and do the ethical thing. Weekends in the Hamptons are probably a great way to get info for your Monday trading day. It's just the nature of things and history shows that. So in reality we have a blend of both and acknowledging that instead of demonizing one or the other is probably more helpful in the long run. IMHO.

Jim in San Marcos said...

Hi Anon *:53

I do tend to oversimplify a tad to make things easier to understand. It's comments like yours that fill it in and make it more complete.

Thank you for your input.

Anonymous said...

I'm not out and about much but I find an amazing number of people who either arent' paying attention at all or believe that the government (tooth fairy) will save everything in the end. I hear a lot of complaining but most are "holding the course" as all will be well again in the future. The thought that it might not be never enters their minds.

Jim in San Marcos said...

Hi Anon 5:26

I agree. This catastrophe will work itself out in a couple of years. I get irritated when one political party takes the credit while the other gets the blame.

There are no political solutions when the cause is political. Congress has been digging deep holes for years and they have never figured out how to fill one. Nobody has really cared up to this point.

As Winston Churchill dryly pointed out during WWII "Americans can always be counted on to do the right thing...after they have exhausted all other possibilities." We're just not there yet.

Thank you for your comments.